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Bond Report: 30-year Treasury yield falls to lowest since January after U.S. announces its first confirmed case of omicron variant

The 30-year Treasury yield fell to its lowest level in almost 11 months, while the rest of the curve turned mixed, after the U.S. confirmed its first case of the omicron variant of the coronavirus that causes COVID-19.

The drop in long-dated yields came as rates five years or less remained higher, flattening the spread between 2- and 10-year rates and the gap between 5- and 30-year yields for a second session, according to Tradeweb data.

What are yields doing?

The yield on the 10-year Treasury note

fell less than 1 basis point to 1.433% from 1.44% at 3 p.m. Eastern Tuesday. Yields and debt prices move in opposite directions. It was the lowest level for the yield since Nov. 9, based on 3 p.m. levels, according to Dow Jones Market Data.

The 2-year Treasury yield

rose 3.9 basis points to 0.563% from 0.524% Tuesday afternoon. It’s the yield’s largest one-day gain in more than a week.

The 30-year Treasury bond yield

dropped less than 1 basis point to 1.778%, down from 1.784% late Tuesday. It’s the yield’s lowest level since Jan. 5.

What’s driving the market?

Financial markets have been on a roller-coaster ride in recent sessions as investors attempted to come to grips with the prospect of a faster-than-expected tapering of bond purchases by the Federal Reserve, along with the implications of the omicron variant.

Yields turned mixed on Wednesday after the U.S. reported its first confirmed case of the omicron variant. The case, involving a California individual who returned from South Africa on Nov. 22, was confirmed by the California and San Francisco departments of public health and the Centers for Disease Control and Prevention, said Dr. Anthony Fauci, President Joe Biden’s top medical adviser.

Dow industrials DJIA unwound a 520-point gain as the stock market turned lower after the confirmed case was announced. Oil futures finished lower.

Meanwhile, in a second day of testimony before lawmakers on Wednesday, Powell said that he doesn’t think the central bank’s plan to pull back on, and ultimately end, asset purchases should disrupt financial markets. The Fed chairman had surprised market participants a day earlier, by opening the door to speeding the tapering process when policy makers meet later this month.

Data released Wednesday from the ADP National Employment Report showed that the U.S. economy added 534,000 private-sector jobs in November. It was the third straight month of job gains above 500,000, and above the estimated 506,000 gain that was expected by economists polled by The Wall Street Journal.

IHS Markit’s final November purchasing managers index reading on manufacturing activity dropped to 58.4 vs an initial 59.1, while Institute for Supply Management data showed a pickup in U.S. manufacturing last month.

The Fed’s Beige Book of economic anecdotes across the central bank’s regions found “widespread” price increases across sectors of the economy in November, and showed that nearly all 12 districts reported “robust” wage growth.

What are analysts saying?

The problem for the bond market posed by the omicron variant “is to know not only how big this threat is, but whether it is deflationary or inflationary,” said Steve Barrow, head of G-10 strategy at Standard Bank.

Policy makers in the U.S. and the U.K. “seem to be skewing the risks towards higher inflation and we think this is correct,” he said. “So, while there’s no doubt that bonds will rally and yields fall if risk aversion takes an even firmer grip, bond bulls have to remember that the cost of omicron could be higher inflation — and higher yields — over the longer term.”

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